The Examination Question Paper and Examination Answer

Booklet must not be removed from the examination room.

Both must be handed in at the end of the examination

DIPLOMA PROGRAMMES
MAIN EXAMINATION
Date : 28 August 2018

Module : ECO0006 Economics for Managers

Time : 14:15 – 17:15

Duration : 3 hours

Total no. of pages : 10 pages (including this cover page)

INSTRUCTIONS TO CANDIDATES:

1. This examination carries a total of 100 marks. Answer ALL questions:

Section A (20 marks): 1 question with 10 multiple-choice sub-questions

Section B (80 marks): 4 questions

2. Answer Question 1 on the Multiple-Choice Questions (MCQ) Answer Sheet

provided separately using a black 2B pencil. Fill in the MCQ Answer Sheet
carefully. You will get a zero (0) score if your index number is filled
incorrectly.

3. Answer Questions 2 to 5 in the answer booklet provided. Fill in the cover page
carefully. You will get a zero (0) score if your index number is filled
incorrectly.

4. All answers must be clearly written. Begin each question on a fresh page.

5. The use of non-programmable calculators is permitted in this examination.

6. This is a closed book examination. No unauthorised materials are allowed in the

examination venue.

At the end of the examination:

Please ensure that you have written your index number on each answer booklet used:
failure to do so will mean that your work cannot be identified. If you have used more
than one answer booklet, please tie them together with the string provided.

SIM GLOBAL EDUCATION RESERVES THE RIGHT NOT TO MARK

YOUR SCRIPT IF YOU FAIL TO FOLLOW THESE INSTRUCTIONS.

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SECTION A

Question 1 (20 marks)

Answer the questions by choosing the best option. Fill in the ovals on the Multiple-
Choice Questions (MCQ) Answer Sheet provided separately using a black 2B
pencil.

1. Scarcity refers to __________________________.

(A) the value of the next best alternative forgone

(B) the situation where unlimited wants is constraint by limited resources
(C) productive inefficiency
(D) allocative inefficiency

2. Which one of the following can be considered to be an inferior good?

(A) A bowl of noodles sold at a non-air-conditioned food court.

(B) A bowl of noodles sold at a restaurant.
(C) A packet of instant noodles sold at a convenience store with an income
elasticity of demand that is greater than 0 but less than 1.
(D) A packet of instant noodles sold at a vending machine with an income
elasticity of demand that is less than 0.

3. A profit maximizing monopoly sold its 7th unit of output for a marginal revenue
of $100 and incurred a marginal cost of $80. Predict the likely change to output.

(A) Increase.
(B) Decrease.
(C) Increase then decrease.
(D) Remain the same.

4. The optimal output of a monopolistic competitive firm is 10 units. At this

output, the firm faces the following price and cost figures:
Price ($) Marginal cost ($) Average cost ($) Average variable
cost ($)
6 5 8 7

Which one of the following decisions is the firm likely to make?

(A) Increase output to 11 units.
(B) Increase price to $8.
(C) Decrease output to 0 units.
(D) Decrease price to $5.

DIPL/ECO0006/Aug2018/MainEQP Page 2 of 10
5. Which one of the following factors will decrease the size of the spending
multiplier?

(A) Expectations of a rise in income.

(B) An economic boom.
(C) An impending recession.
(D) All of the above options.

6. The economy of Cape City generated a real gross domestic product (GDP) of
$500,000 in 2017. What is the real GDP per capita if the population size is 1000
in 2017?

(A) $500,000,000
(B) $500,000
(C) $500
(D) $5

7. Which one of the following will cause the money demand curve to shift to the
right?

(A) A rise in interest rates.

(B) A fall in interest rates.
(C) A fall in disposable income.
(D) A rise in disposable income.

8. The table below shows the expenditure components of an economy.

Component ($)
Consumption 50
Fixed Capital 12
Inventory 15
Government Spending 90
Transfer Payments 5
Exports 70
Imports 35

Calculate the gross domestic product of the economy.

(A) $207
(B) $202
(C) $187
(D) $192

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9. An import quota is used to ___________________.

(A) reduce the level of imports

(B) reduce the level of exports
(C) reduce the level of producer surplus
(D) reduce the capital account deficit

10. The table shows the output by Paradise Island and Guacamole Town, using the
same amount of resources.

Country Avocados (kg) Surfboards (units)

Paradise 20 30
Island
Guacamole 500 100
Town

Which one of the following statements is TRUE?

(A) Paradise Island has an absolute advantage in the production of

surfboards.
(B) Paradise Island has a comparative advantage in the production of
avocados.
(C) Guacamole Town has a comparative advantage in the production of both
avocados and surfboards.
(D) Guacamole Town has an absolute advantage in the production of both
avocados and surfboards.

DIPL/ECO0006/Aug2018/MainEQP Page 4 of 10
SECTION B

Answer ALL questions.

Question 2 (20 marks)

Singapore will introduce a carbon tax on large polluters from 2019 onwards. Between
30 to 40 companies responsible for 80% of Singapore’s greenhouse gas emissions will
have to pay the carbon tax. Households will also be affected and can expect to pay
more for electricity usage. The objective of the carbon tax is to encourage the reduction
of greenhouse gas emissions.1

(a) Explain the effect of the carbon tax on the equilibrium price and quantity in
each of the following markets from 2019 onwards. Draw demand and supply
diagrams to illustrate each scenario separately.

(i) Energy-saving refrigerators.

(4 marks)

(ii) Petrol, one of the industries that will be required to pay a carbon tax of
$5 per tonne of emissions.
(4 marks)

(b) Predict the effect of the expected rise in household electricity bills on the total
revenue of electricity companies. (Hint: Consider the price elasticity of demand
for electricity)
(4 marks)

(c) When household electricity price rose from 20 cents per kWh to 26 cents per
kWh, the XYZ solar company expects its sales of solar powered lamps to rise
from 2,000 units to 5,000 units.

(i) Calculate the cross elasticity of demand of solar powered lamps with
respect to electricity.
(2 marks)

(ii) Use your answer to (c)(i) to comment on the relationship between solar
powered lamps and electricity.
(2 marks)

1
Extracted from The Straits Times “Carbon tax will affect mainly large polluters”, 20 February 2018

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(d) Mr Green expects his monthly income to rise from $5,000 to $6,000. Therefore,
he thinks that he can afford to increase his electricity consumption from
400kWh to 450kWh per month.

(i) Calculate Mr Green’s income elasticity of demand for electricity.

(2 marks)

(ii) What type of good does Mr Green consider electricity to be?

(2 marks)

DIPL/ECO0006/Aug2018/MainEQP Page 6 of 10
Question 3 (20 marks)

Jamaica Valley is one of the many companies that sells tea leaves and faces the
following cost structure.

Average
Quantity Price ($ Total Cost Marginal
Total Cost
(kg) per kg) ($) Cost ($)
($)
0 400 500 - -
1 400 600 100
2 400 690 345
3 400 800 110 267
4 400 400 300
400 2000 800 400

(a) Reproduce the table in your answer booklet and fill in the missing values in the
grey boxes.
(4 marks)

(b) Deduce the market structure for tea leaves. Provide ONE (1) justification for
your answer.
(2 marks)

(c) Find the profit-maximising output for Jamaica Valley and the corresponding
level of profit made.
(4 marks)

(d) Explain the changes that is likely to happen to the profit level found in (c), in
the long run period of production.
(4 marks)

(e) Use a diagram to illustrate and explain why the long run profit level of Jamaica
Valley indicates that the firm is allocative efficient.
(4 marks)

(f) State if Jamaica Valley will be productive efficient in the long run period of
production. Explain your answer.
(2 marks)

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Question 4 (20 marks)

(a) Identify and explain the function of money illustrated by each of the following
scenarios. You should answer each part separately.

(i) Keller uses Singapore dollars to pay for his school fees.
(2 marks)

(ii) Samy purchased and took home a $10,000 curved television set on 31
January 2017, but only paid for it on 31 January 2018 for a total amount
of $11,000.
(2 marks)

(b) The central bank of Avatar Island imposes a 25% required reserve ratio on the
only commercial bank in the economy.

(i) Explain the purpose of imposing the 25% required reserve ratio.
(2 marks)

(ii) If the residents of the island do not hold any cash and deposited $70,000
in the bank, what will be the total money supply in the economy
eventually?
(2 marks)

(iii) How much money was “created” through the deposit of $70,000?
(2 marks)

(iv) Explain TWO (2) factors that can cause the total money supply created
to increase.
(4 marks)

(c) Analyse how a purchase of government bonds by the central bank can lead to
inflation. Use the money transmission mechanism and relevant diagrams to help
illustrate your answer.
(6 marks)

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Question 5 (20 marks)

(a) The performance of an economy in 2017 is summarised in the diagram below.

Aggregate Expenditure (AE)

Potential GDP

AE

Real GDP
250 300

(i) State the equilibrium level of gross domestic product (GDP) of the
economy in 2017.
(2 marks)

(ii) Calculate the output gap of the economy. Does the economy face an
expansionary gap or a contractionary gap?
(2 marks)

(iii) If the marginal propensity to consume (MPC) is 0.9, find the change in
government expenditure required to close the output gap.
(2 marks)

(iv) Reproduce the diagram above in your answer booklet and show the final
equilibrium position of the economy when the output gap is closed.
(2 marks)

(v) Discuss whether the standard of living of the residents in the economy
will improve when the output gap is closed.
(6 marks)

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(b) The table shows the labour statistics of the above economy in 2017:

Population above Unemployed Employed Discouraged

16 Years of Age Workers Workers Workers
50,000 3,200 40,000 250

(i) Calculate the labour force participation rate.

(2 marks)

(ii) Calculate the unemployment rate.

(2 marks)

(iii) Deduce the key type of unemployment faced by the economy.

(2 marks)

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